Buying your first home is an exciting investment. But, it also requires a lot of careful planning, research, and making smart financial choices. Whether you want to purchase a new home later this year or you’re just starting to think about the future, the first step is to start saving for a down payment. Here, we will talk about the benefits of a larger down payment and how to save for your dream home.
Why Do You Need a Down Payment?
First-time homebuyers often underestimate the expenses that come with buying a new house. As a property owner, you’re accountable for many additional expenses—such as closing costs, moving costs, property tax, maintenance, and more. By saving for a larger down payment, you can demonstrate that you are financially prepared for the responsibilities of homeownership.
The amount you put down on your house will influence the type of mortgage you qualify for, how much your lender is willing to give you, and the loan’s terms and conditions. If your down payment is too little, it will cost you more in interest and fees over time. On the other hand, if you pay too much, you could potentially deplete your savings and negatively impact your financial health. So, how much should you save?
However, you may not always find it possible to pay a down payment of 20% or more. In this case, you can always turn to government-sponsored mortgages that require a much smaller down payment. If you’re a first-time homebuyer, you can qualify for FHA loans with as little as 3.5% down payment. CalVet loans can help veterans become homeowners with zero down payment.
Benefits of a Larger Down Payment
While not always possible, making a large down payment will decrease the interest you have to pay over the loan’s lifetime. In addition, if you make a significant down payment, your lender may also offer you a lower interest rate as you represent less of a risk.
Smaller Monthly Mortgage Payments
Putting down more money upfront means you’ll be borrowing less. This also means you have less to pay back, freeing up cash for other future financial needs.
No Private Mortgage Insurance (PMI)
As mentioned before, if you make a down payment of more than 20%, you won’t have to pay for PMI. The purpose of this type of insurance is to protect the lender if you default. It does not compensate you in any way.
Based on the size of the down payment and mortgage, loan term, and your credit score, PMI typically costs between 0.25 to 2% of your loan balance per year. Also, as PMI is a percentage of the mortgage amount, the more you borrow, the more PMI you will pay.
According to the Homeowners Protection Act, PMIis canceled when your down payment plus the loan principal you’ve paid off amounts to 22% of the house’s purchase price.
Improves Odds of Getting the House
A higher down payment proves to the seller that you have the necessary funds to obtain loan approval and pay closing costs. When the market is competitive, and sellers are receiving multiple offers, they are more likely to choose a buyer with a sizable down payment and motivation to see the transaction through with minimal haggling.
Though higher down payments come with several advantages, they might not be the right option for you. You need to weigh the pros and cons of your situation and financial responsibilities to decide on the amount you’re willing to put down on your new home.
4 Ways to Save Money for Down Payment
Saving a significant amount of money for a down payment is an essential step in becoming a homeowner. However, the down payment should not affect your emergency fund and future financial health. Though this may sound daunting, you can make your property ownership dreams come true with the right plan.
Do Your Research
Study the market trends and home prices in and around your desired location. This is an important step in determining how much you need to save for a house.
If you’re a first-time homebuyer, it would also be beneficial to consult with a licensed mortgage professional to learn more about what you can expect throughout the homebuying process.
Our team of experts will work with you to learn more about your unique financial situation and advise you on how much down payment you should prepare for and the different types of mortgages available.
Fix a Down Payment Amount
If you want to buy a house that’s on the market for $300,000 and you decide to put down 20%, you will be paying $60,000 upfront. Though this is a substantial sum, it will allow you to avoid PMI payments.
Trying to save such a large amount of money can be very overwhelming. Break your large goal into smaller, more manageable goals and spread them over a specific timeframe. For example, if you want to purchase a house in six years and decide on a down payment of $60,000, you should plan to save $10,000 per year—or $840 per month.
Create a Budget and Stick to It
Now that you have a monthly goal, it’s time to start saving! Take a close look at your finances to see if there are areas where you can cut back your spending.
Did you know that by reducing your grocery budget by just $50 a month, you can save $400 in 8 months? Examine your daily habits, reduce unnecessary expenditures like takeout orders, and redirect that money into your home savings account.
Check If You Qualify for a Government Loan
If you’re a first-time homebuyer in California, you have a vast number of resources to turn to for financial help. The California Housing Finance Agency offers several down payment assistance programs to make homeownership more affordable for first-time buyers.
Buying a home is not an impossible endeavor. From helping you choose the right loan programs to decide on the appropriate down payment amount for your situation, the McLellan Team is here to help you navigate the home buying process and avoid any bumps and pitfalls that could occur along the way.